Ukraine's WTO membership will spur its economy

PolyaLesova

NEW YORK (MarketWatch) -- Ukraine's admission to the World Trade Organization this week will speed up economic growth and foreign investment in this big Eastern European country whose economic potential has often been overshadowed by its turbulent politics.

Fourteen years after Ukraine first applied for membership, the World Trade Organization finally welcomed the country as a member on Tuesday. The Ukrainian parliament now has to ratify the agreement by July 4 this year.

"We are ready for our full integration to the global economic space," said Ukrainian President Viktor Yushchenko on Tuesday at the official accession ceremony in Geneva, according to an audio transcript of his remarks published on the WTO website.

Yushchenko described the event as historic and said that WTO membership will boost GDP growth, increase the quality and size of foreign investment, and will facilitate the signing of a free-trade agreement between Ukraine and the European Union.

With a population of 47 million, Ukraine has enormous economic potential and an attractive geographic position between Russia and Europe. Ukraine gained its independence after the dissolution of the Soviet Union in 1991.

Relations with Russia, which is also seeking to join the WTO, have been strained in recent years by disputes over the pricing of Russian natural gas as well as by Ukraine's desire to pursue closer integration with Western Europe.

"Ukraine fully supports the accession of the Russian federation and we hope that this will happen as soon as it is feasible," Yushchenko said.

Besides Russia, Ukraine's main trading partners include the European Union, Turkey, Belarus and the United States. Ukraine's GDP grew by 7.3% year-on-year in 2007 and is expected to grow 6.7% this year.

Ukraine's main exports include ferrous and nonferrous metals, fuel and petroleum products, chemicals, machinery and transport equipment, and food products. Agricultural products account for about 13% of Ukraine's exports, while manufactured products account for almost 72% and fuels and mining for 13.6%.

"WTO entry will not only intensify competition on the domestic market, but also introduce higher safety and quality standards to nearly all sectors of the economy," said Alexander Valchyshen, Kiev-based head of macro/fixed-income research at ING, in a note on Wednesday.

At the same time, WTO membership may cause some slowdown in sectors that have been protected by state subsidies for a long time, particularly agriculture and farming, he said.

"However, we expect the economy to benefit from accession in the longer term as Ukraine's largest exporters, such as the steel sector, are likely to see an increase in export volumes," Valchyshen said. There will also be sustained growth in trade and services.

Alex Brideau, an analyst at the Eurasia Group, said that WTO membership is "an important step forward in Ukraine's efforts to increase foreign investment into the country, as well as to integrate with European trading partners."

Ukraine's steel sector will gain as quotas set by the EU will end with WTO accession, while the agricultural sector and the automotive industry could suffer from the dismantling of existing tariff regimes, Brideau said in a research note.

Tariffs on industrial products will be reduced to 4.95%, while those on agricultural products to 10.66%.

WTO membership will definitely strengthen Ukraine's relationship with Europe, Brideau said. A key pillar of that relationship is a free-trade agreement with the European Union, which is Ukraine's largest trading partner and its largest market.

As for relations with Russia, those might get even more complicated despite Yushchenko's assurance that Ukraine supports Russia's WTO membership.

"Relations are already strained by Ukraine's desire to make major changes to the natural gas import relationship," Brideau said. Ukraine's ambition to join the North Atlantic Treaty Organization is also very unpopular with Russia.

"Complications in Russia's WTO admission process caused by Ukraine would increase the chance that a major row between the two countries could erupt in 2008," Brideau said.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.